Corporate Reason in the Age of Analysts

Brilliance is sometimes simply being willing to say the obvious and to stick with it. On the one hand, we have the myopic analysts, and on the other, we have a few select folks like superinvestor Warren Buffett and company.

Contrast the rationale of analysts found in the prior link, with the recent words (2005 Chairman's letter) of Warren Buffett:

"Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.

When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as '“widening the moat.' And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted.

Take a look at the dilemmas of managers in the auto and airline industries today as they struggle with the huge problems handed them by their predecessors. Charlie is fond of quoting Ben Franklin's 'An ounce of prevention is worth a pound of cure.'

But sometimes no amount of cure will overcome the mistakes of the past."

Something to think about the next time you're pondering an investment ...


JW

The Confused Capitalist